So much for that “one-time correction.” The People’s Bank of China let the yuan drop again overnight, fixing the currency 1.6% below Tuesday’s close, following the 1.9% devaluation heard around the world a day ago.

Deutsche Bank, for one, is predicting the yuan is overvalued by around 10%, so if the yuan continues to weaken, things could yet get a lot darker for markets. And stocks aren’t dealing well with the new China reality they’ve seen so far.

Jani Ziedins of the Cracked Market blog says the U.S. market’s reaction — the S&P 500 fell 1% Tuesday, and futures are pointing sharply lower on Wednesday — looks a bit overdone. Still, he says, it’s understandable given the reasons behind it — fears of much bigger economic problems in China. Good news? “...if a crumbling Chinese economy cannot bring down this market, then nothing will and all we can do is hang on and enjoy the ride,” he says.

Ziedins says watch the next two days to get some insight into the market’s psyche. Either selling is revving up to drop this market to levels not seen in years or this emotional purge will exhaust itself, and a rebound will follow, he predicts. Our chart of the day shows just how long it’s been since the S&P 500 has had a decent correction.

But if death crosses and visions of rotting Apples are disturbing your sleep, you aren’t alone. ”The darkest horizon ever approaches, infused with Chinese black coal,” predicts the Fly, blogging for iBank Coin. It’s time to be cautious, he says. More on that here.

If you really want to shiver your timbers, then check out our call of the day. One of the biggest bears out there is riding the China devaluation to the hilt, talking boils and puss and predicting a financial crisis a la 2008. Brr...

Elsewhere, gold
US:GCZ5
is pushing higher. Crude oil
CLU5, +0.00%
is rallying after an International Energy Agency report on the state of supply and demand.

The stat

Oil demand is growing at its fastest pace in five years, says the International Energy Agency. That’s the good news. The bad news? Rival production will only start to taper off next year.

The quote

“If we turn around and nix the deal and then tell them, ‘You’re going to have to obey our rules and sanctions anyway,’ that is a recipe, very quickly ... for the American dollar to cease to be the reserve currency of the world.” — U.S. Secretary of State John Kerry speaking about Iran at a Reuters Newsmaker event on Tuesday.

Earnings

China’s top e-commerce provider AlibabaBABA, +0.87%
is getting dinged in premarket after revenue fell short of estimates. It’s also buying back $4 billion in stock. Macy’sM, -0.23%M, -0.23%
is also down in premarket after cutting its full-year same-stores sales outlook. They’re also unveiling new ventures in China and Brooklyn.

After the close, CiscoCSCO, -1.70%
and News Corp. (the publisher of MarketWatch) will report.

The economy

New York Fed President William Dudley will speak on the economic outlook in Rochester NY at 8:30 a.m. He’s known to be one of the most dovish members of the FOMC. Watch any Q&A and comments on China, as well as clues about a September hike.

The call

SocGen’s permabear, Albert Edwards, is among those who have been calling this yuan devaluation for years. So a little gloating is in order, we guess.

Weighing in on yesterday’s move in a fresh note, Edwards predicts China’s actions will release a tidal wave of deflation in the West. “Make no mistake, this is the start of something big, something ugly,” he says. And while western nations have been sighing with relief over abating deflation pressures, Asia has presented a “puss-filled boil” that needs to be lanced, he warns.

“We have long believed that we are only one misstep from outright deflation in the West, with core inflation in both the U.S. and the eurozone at just 1%. We expect the acceleration of EM devaluations to send waves of deflation to the West to overwhelm already struggling corporate profitability and take us back into outright recession,” Edwards says.

With that, he predicts “a financial market rout every bit as large as 2008,” along with sub-1% 10-year Treasury yields
TMUBMUSD10Y, -0.43%
as core inflation drops below zero.

Note that Edwards has had his share of misses. As CNBC recently pointed out, the S&P 500 has gained nearly 50% since the strategist warned in September 2012 that the U.S. was in recession and a Wall Street rout was coming. Read that story here, where he also predicts a repeat financial crisis.

Earnings

China’s top e-commerce provider AlibabaBABA, +0.87%
is getting dinged in premarket after revenue fell short of estimates. Macy’sM, -0.23%M, -0.23%
is coming up.

FossilFOSL, +1.17%
is down in premarket after the company said last night a stronger U.S. dollar was harming earnings and impacting its outlook.

After the close, CiscoCSCO, -1.70%
and News Corp. (the publisher of MarketWatch) will report.

The chart

Short Side of Long blogger Tiho Brkan reminds us that the S&P 500 is in one of the longest stretches in its history — nearly 4 years — without a meaningful correction. He’s watching to see if the index drops below its 200-day moving average support of around 2,075. Pressures’s on as the S&P 500 has traded above its 200-day moving average for 183 out of the last 187 weeks.

Yesterdays’ tumble for the S&P 500 and futures calling for another rout this morning mean the bears could be ready to take control, at least for a while, says Brkan. Read the full blog here.

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